Thursday, October 27, 2011

US GDP Growth and the Budget Deficit

According to the US Department of Commerce, GDP in the quarter ended Sept 30, 2011 grew at a 2.5% annual rate or by $185.8 billion in the quarter. A few weeks earlier, the US Department of Treasury reported that for the fiscal year ended Sept 30, 2011, the budget deficit grew by $1.3 trillion, or roughly $325 billion for the quarter. So the government spent a total of $325 billion more than it received in tax revenue in the third quarter so the economy as a whole, government, corporate and private sectors could generate a total of $185.8 billion in incremental sales of goods and services. Why didn't somebody think of this before?

Deficit spending comes at a price, of course, otherwise Latin America would long since have ruled the global economy. But we in America have the luxury of being the world reserve currency and other advantages that blur the importance and even significance of fiscal discipline.

Nonetheless, the US budget deficit for the most recent fiscal year equaled 8.7% of GDP, down from the 9.1% recorded for the prior fiscal year, but all the same, a near record high. It's also important to note that this slight improvement in the debt ratio was actually driven by higher tax revenue as outlays also increased, but at a slower rate than revenue.

According to the US Debt Clock http://www.usdebtclock.org/, total US debt is now $14.8 trillion and counting. And at an annual budget deficit of $1.3 trillion, we're counting pretty fast - at a rate of roughly $3.6 billion per day, every day, weekends and holidays included.

Now what's even more stunning about this, is that for the 2007 fiscal year, the year prior to the advent of the credit crisis, total US debt stood at $9 trillion. And if we run the clock back to 2000 that number drops to $5.6 trillion. Were we go all the way back to 1980, before the great expansion, total US debt falls to a mere $900 billion.

What's astounding to us, though, is the scale of the budget deficits that we are now sustaining. To provide some perspective, it might be worth pointing out that with deficits now in excess of $1.3 trillion for each of the past three years (2008-2011) the largest deficit the country ever recorded prior to this period was $467 billion in 2008 (each of these in inflation adjusted dollars). We might also add to this astounding borrowing binge, the $2 trillion that the Federal Reserve Bank has added to its balance sheet through QE I and II.

So let's stop and think about this for a minute. We're now roughly four years into the credit crisis. We've had zero interest rates for most of that time, impoverishing savers, we've increased the national debt by roughly $5.8 trillion (or by 64%) and we've added $2 trillion to the Fed. Meanwhile, unemployment continues to run in excess of 9%, we've had sub 1% GDP growth for the first six months of the year and now we're wildly celebrating preliminary GDP growth of a mere $2.5% in Q3.